STRS investment slammed as risky strategy
Two trustees of the State Teachers Retirement System of Ohio pitched a “business partnership opportunity” that involves putting $65 billion – nearly two-thirds of the pension fund’s portfolio – in the hands of a new company that lacks any performance track record.
The pitch triggered sharp questions and pushback from STRS staff, consultants and other trustees at their November board meeting. STRS trustee Rita Walters said she rejected the idea when she first heard about it two years ago.
“There’s a voice in the back of my head saying, does the name Bernie Madoff mean anything to you?“Walters said at the meeting. “I was thinking to myself, I wouldn’t even invest my own money in this.”
STRS Ohio oversees $98 billion invested on behalf of 500,000 teachers,
retirees and beneficiaries. STRS Ohio’s 11-member board is a combination of unpaid elected and appointed trustees.
While the board did not vote on the two trustees’ proposal, it could return for more debate later, STRS Ohio Board Chairman Robert Mcfee said.
“They were promoting a partnership with a company called QED (Management LLC), that has no staff, no clients, no money under management,” Mcfee said. “This entire strategy they’re proposing, QED has never implemented it before. They have no track record.”
A faction of retired teachers is unhappy that they lost their annual cost of living adjustment in recent years and gripe about the high fees paid to investment managers.
Backers of the QED partnership claimed their plan could bring back the COLA, chop contribution rates, lower investment fees and involve little financial risk.
Mcfee said such a combination doesn’t exist. “But I believe everybody is searching for the best way to maximize our returns.”
What is QED?
Former Franklin County treasurer Wade Steen, retired economics professor Rudy Fichtenbaum – both current trustees – and former trustee Bob Stein suggested that STRS Ohio explore going into business with QED Management LLC and name the partnership Ohio AI.
QED is run by Jonathan Tremmel and Seth Metcalf, a former top aide in the state treasurer’s office under Republican Josh Mandel. Metcalf registered QED Management and Ohioai with the Ohio Secretary of State on Oct. 6, 2020. Tremmel registered QED Technologies on March 19, 2019.
QED first approached STRS staff in April 2020 but it is unclear when the company may have contacted trustees.
During the public presentation, STRS Ohio Chief Investment Officer Matt Worley threw sharp questions at Steen, Fichtenbaum and Stein, asking them if they were representing QED and demanding they disclose who owns QED.
“I think certain board members have a relationship with QED. They’ve been meeting with them regularly, having conversations not in this board room, not in this open forum,” STRS Ohio Board Chairman Robert Mcfee said in the contentious, three-hour meeting. “I want to know what is that relationship.”
The three said they weren’t representing QED.
Metcalf declined to comment about the company, its staff, ownership or experience. Yet he said: “I do not think how QED was represented at the board meeting was accurate.”
The pitch: QED would handle $65B
To maximize return, Fichtenbaum said STRS would have to earmark $65 billion of the pension fund’s $98 billion portfolio to purchase treasury bonds.
Those bonds would be loaned out to other investors for fees. QED would manage the process. He suggested starting off with $250 million to see if the idea works.
The QED pitch had already been rejected by STRS investment staff and an outside consultant. Fichtenbaum, Steen and Stein insisted that the board hear a presentation anyway.
STRS Ohio general counsel Stacey Wideman cautioned that the pension fund is examining “legal concerns” surrounding the proposal and presentation.
Steve Nesbitt, chief executive of Cliffwater, which is one of the board’s investment consultants, rattled off 10 reasons why the QED investment partnership is a bad idea. Among them is QED lacks a performance track record, the idea requires a large-scale commitment of STRS assets and investments would be concentrated in a single outside firm.
Nesbitt also said the proposal “converts STRS’ relatively transparent investment strategy into a highly-levered opaque, black-box strategy, likely drawing both public and regulatory scrutiny.”
Fichtenbaum said STRS may have remorse years from now.
“Somebody else is going to do this idea and we are going to be looking back and saying to ourselves, we had an opportunity here to really make a lot of money for this pension,” he said.
Fichtenbaum said later that STRS staff and hired consultants purposely disrupted his presentation. “I don’t think we were really given a chance to make what I’d call a coherent presentation.”
Discontent over COLA cuts
Discord has been brewing at STRS Ohio, where teachers have been forced to accept benefit cuts and retirees lost their cost of living allowance. From 2013 to 2017, the pension fund cut their annual cost of living adjustments until it finally eliminated them altogether.
Mcfee said STRS staff is exploring options for bringing back some cost of living adjustments, possibly as early as this spring.
“We want some sort of inflation protection for retirees but we need to do it in a way that’s sound financially for the system,” Mcfee said.
The QED proposal isn’t the right answer, said Aristotle Hutras, the former long-time director of the Ohio Retirement Study Council. He called it a dangerous, risky idea that has been thoroughly vetted and rejected.
“I understand the retirees’ frustration – I get it – but this is no way to get your COLA,” Hutras said. “When $65 billion of the $98 billion is exposed, where do they go when that blows up? It’s a bad idea.”
Laura Bischoff is a reporter for the USA TODAY Network Ohio Bureau, which serves the Columbus Dispatch, Cincinnati Enquirer, Akron Beacon Journal and 18 other affiliated news organizations across Ohio.
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